Last year, around June timeframe, I decided to stop funding my 401k. Since I’ve been working full-time in industry, I have always made a conscious effort to contribute to the 401k each and every year. As of April 2014, I have contributed $0 to this year’s 401k.
That is all about to change. Just recently, I elected to re-enroll back into my company’s plan, and may very well end up contributing up to the max this year.
So, why the sudden shift in my investment philosophy?
Accomplished Last Year’s Goals
In June 2013, I owned two rental properties and was working on closing Rental Property #3. I knew that I wanted out of the rat race, and I realized I would need a lot more passive income to make early financial independence possible.
By stopping my 401k contributions when I did, I was able to basically save those retirement pennies, and instead funnel it into my downpayment fund to help purchase Rental Property #4 and Rental Property #5.
Today, I own five properties, and am getting closer to reaching my early FI passive income goals. One of my focuses for 2014 is to slow down the speed of acquisition and to focus more on building cash reserves. In other words, I’ve done the bulk of the heavy lifting (2012-2013), and don’t need to buy more properties at such an accelerated rate anymore.
At most, I’ll purchase one additional rental property this year. Further, I may even elect to sell Rental Property #1 this summer, which should make it possible for me to do a 1031 exchange into multiple properties (4-5 would be my guess). Selling Rental Property #1 will shortcut a lot of the acquisition work I would have otherwise had to fund myself.
As a result of all this, I may not have to save as much as I originally thought I would. Further, I have a lot of stock options and RSUs vesting later this year. This provides additional funds to help replenish the cash reserves.
The most important reason why I’m re-starting my 401k contributions is that I need the tax shelter that it provides. Just recently, I did my taxes for 2013, and the results weren’t so pretty. I owe Uncle Sam several thousands of dollars as a result of capital gains from last year… Also, because of my higher income bracket, I wasn’t able to fully maximize my rental property deductions.
That was a sinking feeling… And I would imagine my adjusted gross income being even higher in 2014 (even a measly 2% pay raise doesn’t HURT my income). So, I’ll need to take advantage of my 401k plan to help reduce my taxable income as much as possible. By contributing to the 401k, I will also be able to get in on the company match again. This is free money, after all, so I might as well take it. 🙂
I’m getting closer to declaring early FI. The last piece I need to move to make early FI a reality is to sell Rental Property #1 and perform a 1031 exchange into multiple properties out-of-state. If I can succeed in accomplishing that (either this summer or summer 2015), I should have sufficient income to not only cover all my monthly expenses, but enough left over for capital reserves (properties) and even some for investing back into dividend stocks.
As such, I don’t need to go gangbusters in trying to acquire more and more properties. At most, I will purchase one more property this year with my own funds.
I’m planning ahead, but right now I don’t see the immediate need for more capital. Couple that with the tax shelter and free company match a 401k offers, and my decision to re-invest back into my employer’s plan becomes a no-brainer.
Preview of Things to Come
I like to provide readers an insight into my future plans, and current line of thinking. My plans are ALWAYS subject to change (I can’t control what the markets will do in the future), but I feel like it’s more beneficial to discuss them in real-time, as opposed to after the fact.
The following is what I see happening if everything were to unfold perfectly…
I call it the 3x Rule for funding early financial independence through real estate investing. The 1x is to meet my monthly expenses. The 2x is for capital reserves. The 3x is for more savings/investing.
Semi-Passive Income Target: $4500/month
1x: Monthly Expenses: $1500/month
2x: Capital Reserves: $1500/month
3x: Savings/Investing: $1500/month
1x: It’s still preliminary, but right now I don’t anticipate needing to spend more than $1000/month while I’m overseas. The extra $500/month here is to provide some more cushion, in case I do occasionally splurge here and there. If I don’t end up spending more on a given month, I’ll simply invest the excess into dividend stocks, or savings.
2x: Also, the $4500/month semi-passive income target is the combined net cash flow from all properties in a given year. The net cash flow takes into account small maintenance and vacancy/eviction items. The $1500/month allocation is for capital reserves; these are the big ticket items: roof, furnace, emergencies, etc.
3x: Any remaining cash flow will be saved and invested into dividend stocks. If the stock market is especially HOT, I may elect to just park money on the sidelines temporarily, but the plan for now is to keep on investing even after early FI. Worst case, the 3x will serve as an emergency-emergency fund for the rental properties…
Thanks for reading! 🙂